When even those who made millions trawling America’s murkiest assets are steering clear of Europe, you know it’s a whole different ballgame. Alex Klein talks to the moneymen hanging on the sidelines.

07.07.12 4:45 AM ET

In late 2007, the voluble Texas hedge-funder threw down $110 million against the subprime-mortgage market and made a killing.

When he heard that nickel coins were worth more as scrap metal than currency, he bought about 20 million of them.

And since 2010, Bass has staked out a huge bet against Japan by investing in securities that will skyrocket if the nation ever goes bust.

So, with the euro zone burning, you might expect Bass to be playing the fiddle, getting ready for another big short.

“No,” he told The Daily Beast. “We’re staying as far away from the periphery as we can.”

In fact, right now his portfolio is 90 percent long, meaning that the famously bearish Bass has nine times more money in optimistic bets—most far away from Europe—than in negative ones. In the euro zone, he said, things are so bad, so unpredictable, that “all you can do is avoid the pitfalls.”

When the man who made millions trawling through America’s murkiest assets is steering clear, you know that it’s a whole different ballgame: a crisis so intractable and volatile that even the smart money is running scared.

Bass is not the only one. Robert Koenigsberger led the first-ever private restructuring of a national default. He’s the founder and chief investment officer of Gramercy, a $3.2 billion emerging markets asset manager that made millions managing Argentina’s default process in 2010. So, is Koenigsberger back on debt-ridden sovereign balance sheets, trying to make another play?

“No,” he said. “We’re not involved in Europe today.” Koenigsberger is not betting against the euro zone or buying its ailing assets. He called it a “submerging market,” and said he doesn’t want to be the one to “catch the falling sword.”

Bass and Koenigsberger are part of growing chorus of caution. Times have changed.

Just last year, hedge funders, asset managers, and currency traders were keen to make aggressive bets against euro debt or currency. For example, when Greece first started faltering, a lot of speculators started buying credit-default swaps (CDS): a kind of financial insurance that pays out when a country defaults. Some even shorted the debt directly: that is, they borrowed the loans on the open market and sold them, hoping they could buy them back at a lower cost as things got worse.

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Back then, things seemed simpler: the continent was due for imminent crack-up.

But now, as the crisis drags on and lawmakers waffle, a lot of the same power players are cutting their losses and leaving for safer shores. The problem is political uncertainty. If European authorities throw a “Hail Mary,” as Koenigsberger called it—a bailout, a Greek election, eurobonds—and you’re stuck selling short, your losses could be enormous. It makes more sense just to get out of the market altogether.

Put simply, the Street is scared.

Here’s why: Let’s say you’ve sold short. As things get worse, you get richer. But suddenly: surprise Spanish bailout! Markets rally, and you could be ruined overnight. Regulators can even prevent CDS insurance from paying out.

Now, let’s say you’ve gone “long” and made a positive bet: maybe you bought a Greek house or stock. The next day, European authorities announce another investor “haircut”—something Bass and Koenigsberger say is “inevitable.”

That cuts the value of your investment in half.

Scott Peng, head of global portfolio solutions for SECOR Asset Management, also advises his American and European clients to steer clear of those mercurial markets. “We’re in the very early stages of pain for peripheral countries,” he says. “So far, we have seen few signs that [European lawmakers] have taken an integrated approach.”

While the American financial crisis was bad, it didn’t present Wall Street with such crippling uncertainty. This crisis “isn’t easier because it’s European,” said Koenigsberger. “It’s worse.” As he explained it, “in the US, when we did TARP, we had one Paulson and one Pelosi and it took us two tries. In Europe, we have 17 Paulsons and 17 Pelosis.”

Bass is even more pessimistic. “There is nothing that can save the euro zone,” he said. “When you take a step back and review the idiocy of what’s going on, you see that there is no answer.” Thanks to the euro crisis’s unique blend of economic implosion and political perplexity, the classic ways to make good money in bad times are all but broken, he said.

Even the big name foreign-exchange traders, usually among the most risk-prone, are feeling fearful. Richard Breslow, chief investment officer at EQA Partners, is taking a very conservative short position on the euro currency. The reason? “Extreme volatility.” He said his firm is “running [its] portfolios at a lower risk level than we ordinarily would, so we have the ammunition to trade the market swings.” As for Greek, Spanish, and Portuguese debt—once the hot bets for big name short-sellers—Breslow won’t touch it.

Just days after EU lawmakers reached its latest grand summit (the 19th, Bass reminds me), the markets have been thrown back into uncertainty; hardline Finnish and Dutch creditors are threatening to veto the whole package, and there’s talk of another haircut. And so Bass returns to his trademark line: “A lot of people are going to lose a lot of money,” he says. “And I don’t want to be one of them.”